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Analysis

Moderate Changes to Office Cap Rates and Cash Flows Could Cause Big Problems

Even Class A office faces headwinds according to Morningstar Credit Information & Analytics.

Between work-at-home and hybrid models, worries about recession, and the growing recognition of the potential for massive obsolete stock, there is a lot of concern about the office market. As a Morningstar Credit Information & Analytics (MCIA) report recently noted, the combination of factors “has people speculating that aging office properties may replace regional malls as the bane of commercial mortgage-backed securities investors’ existence.”

Cap rates and net cash flows ultimately drive valuations, but the firm notes the amount of uncertainty around them. Cap rates depend on price discovery, but that is currently severely limited with the reduction of transactions.

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Erik Sherman

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